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With $60B in cash, Microsoft is set to blow up its business

Jul 01, 2012

Don't be fooled. Microsoft's entrance into the tablet market shows nothing less than a willingness to overhaul its business model.

With the recent announcement of Microsoft's new Surface tablet, the decades-old network of partners that Microsoft and Intel built just got a formidable new asset-rich competitor: Microsoft.

Like all successful partner networks, Wintel thrived because all of the players -- the two principals, OEMs, the channel and other stakeholders -- benefited individually from the association during contributing to the growth of the network itself. The Wintel platform is for all that the dominant desktop and laptop computing architecture.

But with smartphones,tablets and the cloud replacing desktops and laptops with remarkable speed, it's a brand new post-PC world. And in the most stunning development imaginable, Microsoft's Surface announcement confirms that Steve Ballmer and company are willing to do whatever it takes to achieve success -- including blowing up the partner network Microsoft helped create -- and that has been the linchpin of the company's dominance for the past 30 years. And it has the financial staying power to do it.

Even although margins from its desktop business peaked in 2010, Microsoft for all that has 90 percent of that market and, as of the most recent quarter reported, assets of $118 billion -- third behind Apple and HP -- including $59.5 billion in cash and cash equivalents.

At the core of Cooper's analysis is how Microsoft is going to compete with Apple: sleek new Surface tablets, Windows Phone 8, which will ship in then-generation Windows Phones, and possibly new capabilities just as a complete mobile payment system. As Cooper noted, "Take that, Apple."

Certainly, competing with Apple is one driver of this gutsy make-it-or-break-it move for Microsoft. But to my mind, the core of the story is actually, "Take that, OEMs and channel partners."

To be fair, there are some who think that Surface is merely an attempt by Microsoft to get its OEMs to step up with better hardware product designs and that it will exit the hardware business as before long as they do. This is a in all seriousness misguided view that partners would do then to ignore.

The post-PC era

Also in the post-PC era, staying close to the customer is everything. It's the only way to ensure a superior customer experience, which -- as Apple has demonstrated -- is a huge competitive advantage.

Apple achieves this by designing the hardware and the software for seamless integration and exercising strict control over the entire Apple ecosystem -- sales, distribution, services and support and even carrier partners. Opposite, until now Microsoft has pursued a strategy of licensing its software to hardware vendors, maintaining modest control in the best case over product and the consumer experience.

And here's one more factor driving this new Microsoft strategy. Owning the ecosystem is the best way to protect the monopoly-style rents Microsoft enjoys on the desktop. If delivering a great user experience is the customer benefit of owning the ecosystem, the vendor benefit is customer lock-in. If you want access to Apple's elegant design, interoperability, great apps and content, and intensely loyal clients, at that time Apple is the only game in town. On the oher side of the coin, Apple takes a piece of everything that flows through its hardware.